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IRS spent millions on audits that returned no revenue, report finds

Brittany De Lea

The IRS is wasting time paying employees to audit returns that generate no additional revenue for the agency, a watchdog report released Thursday found.

Of the 10,755 returns that were analyzed – and closed – during fiscal years 2015 through 2018, a report by the Treasury Inspector General for Tax Administration found that 47.2 percent were closed with no change to the return. The agency estimated that – accounting for the costs of examining the returns – about $22.7 million was spent on these returns, which generated no additional revenue for the government.

These returns were examined in the IRS’ large business and international audit group, which is responsible for the tax administration of domestic and foreign businesses with assets exceeding $10 million.

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Among these businesses with assets over $10 million, the no-change rate of returns examined ranged from 44 percent to 66 percent across all total asset amount ranges. Theoretically, there should be a lower no-change rate for categories of businesses and individuals with a higher risk of noncompliance, which TIGTA largely did not observe from the data.

The division’s closure rate was also 37 percent lower in fiscal 2018 when compared with fiscal 2015, according to the report, which was attributed to a decline in employees.

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TIGTA suggested the division could better allocate its time and resources, spending less time on “no-change work.” It also said that due to the evolving nature of the business environment – including the implementation of the Tax Cuts and Jobs Act and an expanded use of virtual currency – the group needs to update its formula to better identify companies that are at higher risk of noncompliance.

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In a response to the report, the IRS said it did not agree with the watchdog group’s monetary estimates based on the hours it assumed workers spent on no-change work. It also did not agree with some of the recommended policy changes.

The IRS estimates the average annual gross tax gap for tax years 2011 through 2013 is $411 billion, with the largest percentage stemming from underreporting

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